Financial Regulatory Forum

EU says won’t copy U.S. bank plan; bank ethics face scrutiny over Greece

By Reuters Staff
February 16, 2010
Watching the banks

Watching the banks

  BRUSSELS, Feb 16 (Reuters) – Banks in the European Union won’t face a ban on proprietary trading, the bloc’s executive body said on Tuesday, but warned the sector to check its ethics.

Securitised products and derivatives, two areas where banks have raked in revenues over the years, will also come under closer EU scrutiny, officials said.

U.S. President Barack Obama has proposed banning some banks from trading on their own account and limiting their size by forcing divestments of any hedge fund and private equity operation to make them less likely to need public bailouts.

EU finance ministers discussed the plan on Tuesday.

An EU document prepared for the meeting showed there was no consensus to back the U.S. plan which would conflict with the universal banking model in Europe which houses proprietary trading and commercial banking under one roof.

The bloc’s financial services chief signalled no intention to propose a similar set-up for Europe.

“You can’t of course transpose, or copy, ideas or reforms proposed by Obama to the European continent,” newly appointed EU Internal Market Commissioner Michel Barnier told a news conference.

Europe has different banking structures, he said.

“So I can’t say today that we would necessarily be planning to reproduce in exactly the same terms the American plans in Europe,” Barnier said.

“It seems to me that in Europe we have more problems related to the inter-connection of the banks rather than the specific nature of the activities or the scale of individual banks.”

Britain, France and Germany had already said they don’t want to copy Obama’s plan, saying that topping up capital charges is the best way to go and is already under way.

Opposition from the bloc’s top three members makes it impossible for Barnier to put forward EU-wide legislation. U.S. Congressional approval for Obama’s plan — which caught European officials unawares — is also far from assured.

Barnier stressed the need to implement a global deal on regulation agreed by the G20 last September.

 

CHECK YOUR ETHICS

Banks, however, will face scrutiny over how they designed securitised products for Greece to downplay its public debt, which has grown to such an extent it may need a bailout from its euro zone neighbours.

EU Economic and Monetary Affairs Commissioner Olli Rehn said difficulties being faced by Greece confirmed the involvement of investment banks.

“We have to see whether rules have been respected,” Rehn told the news conference.

Banks should look whether their involvement in such products was in line with their code of ethics, Rehn said.

Credit derivatives linked to Greek debt, such as credit default swaps (CDS) which some ministers say were used by speculators to engineer damaging market moves, will also be examined.

“We realise we need more transparency on derivatives, in particular CDS on sovereign debt. This is part of the work we will be doing over the next few weeks,” Barnier said.

He is expected to propose a new EU law mandating central clearing and exchange trading of derivatives where possible “so we know exactly who is doing what”.

(Writing by Huw Jones, editing by Stephen Nisbet)

((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com))

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